Suppose you own a store in a major shopping district. After two break-ins, you meet with the owners of several other nearby businesses who have had similar problems. You propose that you all band together to hire a watchman to patrol the neighborhood after dark. For the five businesses attending, including yourself, the table below reports how much each is "willing to pay" for this police protection:

It turns out that a watchman can be hired for $15,000. If the costs are equally divided across the five businesses, each would pay $3,000 apiece. Since everyone's "willingness to pay" is more than this amount, hiring a night watchman would make each person better off. That is, this resource transfer would increase society's happiness.

But would you expect each businessperson to agree to this plan? The problem is twofold. First, each person only knows his or her own willingness to pay. Despite the fact that we have reported the other businesses' willingness to pay values in the table above, in reality, this information is hidden--unseen and unknowable. Second, each business knows that they will enjoy an external benefit if the other businesses hire the night watchman. This external benefit arises because once burglars know that the neighborhood is being patrolled at night, they will divert their attention to other parts of town. A business that didn't pay for the night watchman could still derive benefits from the other stores' having hired a night watchman.

As a result, the owner of Business B might say to his colleagues, "Hey, I really haven't had any problems. If you guys want to go ahead and get a night watchman, that's fine. Just don't expect me to pay." The truth is that the owner of Business B values a night watchman's services at $6,000. But by lying to his friends, he can wind up paying nothing and still get the benefit of a having a night watchman in his neighborhood. The owner of Business B is what economists call a "FREE RIDER." You may call him a leech.

The problem with free riding is that if the other businesses follow the same strategy, the watchman will not be hired. And that is a shame. It is in the interests of society's happiness to hire a watchman.

Everyone has had experience with free riders. If you have ever worked on a team project in school, you've probably seen the problem up front and dirty. Suppose a team consists of one conscientious student and three slackers. These three may be slackers, but they are certainly no dummies. They know that the conscientious student will work hard no matter what. As a result, the slackers can sit back and goof off, and still receive an acceptable grade for the project. They experience a positive externality from the work of the conscientious student. As a result, they don't work as hard as they would if they were being graded on their own efforts, and the project suffers.

Another example of free riding occurs every Sunday morning in houses of worship all across America. People sit in the pews at church, listen to the sermon, enjoy the fellowship of the congregation, and take advantage of the many services the church has to offer. Yet when the collection plate gets passed around, does everybody pitch in a contribution to help pay the costs of the services? Those who don't are free riding on the contributions of the others.

From these examples, one can see how difficult it is to get the private sector to produce the quantity of a public good which maximizes society's happiness. Whether because of the impracticality of collecting revenues or the free rider problem, for-profit enterprises will find it difficult to collect revenues commensurate with the happiness society receives from public goods. As a result, the private sector will tend to produce too little of the public good. When this happens, there is a role for the public sector.

To be sure, most of us would feel uncomfortable about having the government take over the production of church services. On the other hand, most would agree that government should play a role in the provision of public goods like city streets, the criminal justice system, and national defense. But how does the public sector decide how much of these goods to produce? And will the public sector allocation necessarily be better than the private sector allocation? To answer these questions, we will need to examine just how the public sector makes allocation decisions. That is the topic of the final chapters of this book.